Understanding Chinese Investment in Ethiopia A Critical Evaluation of the World Bank’s “Chinese FDI in Ethiopia” Survey

The World Bank country office in Ethiopia, apparently in response to the request by the government of Ethiopia, has conducted a survey of Chinese FDI (Foreign Direct Investment) in Ethiopia in November 2012. This is a commendable job on the part of the World Bank as Chinese related investments are increasingly becoming important not only in Ethiopia but also across the continent.

Major findings of the study include the growth of FDI from China to Ethiopia from zero in 2004 to about USD 60 million in 2010 and how Chinese FDI in Ethiopia is motivated by the desire to take advantage of the current state of the economy, which the Bank says is growing at a rate of 10Pct in the past few years. According to the study, this increasing Chinese FDI is also motivated by the incentive provided by the governments of China and Ethiopia, political stability in the country and the idea of using Ethiopia as a strategic launching pad for Chinese expansion in the rest of Africa.

The study also points how the Chinese FDI in Ethiopia is found to be constrained by inefficient Ethiopian bureaucracy, foreign exchange risk, lack of finance and skilled labor in the economy, companies spending valuable company time dealing with government officials and their regulation, where the government is taking over 30Pct of senior Chinese management time.

Thus, on the basis of the above findings the World Bank’s study not only offers policy recommendation for improvement but also provided us with quantitative data which are very difficult to get.

Be that as it may, I have two major problems with this study that is carried out to understand ‘Chinese investment engagement’ in Ethiopia. It is legitimate to infer that the World Bank’s motivation for this study is to understand the role of Chinese investment on technological transfer, industrialization and development of Ethiopia through investment, as that is explicitly noted in the document. If this is the case, first, presenting a survey of FDI in Ethiopia without contextualizing it in the total FDI flows and stock to/in the country, or in comparative terms, say Ethiopia’s share vis-à-vis the same share among African countries, gives the impression that this Chinese FDI is important in Ethiopia.

In reality, however, the Chinese FDI in Ethiopia is not actually that important and negligible at best. For instance, in the whole of Africa, the main source countries for FDI flows are still the developed (OECD) countries which command over 72Pct of the flows between 2000 and 2008 and 90Pct of the stock in 2008. Among them, France, UK, Germany and the US are very important.

Thus, FDI flows from emerging economies to Africa, although growing very fast, is not that big in terms of relative magnitude. Even the much talked about Chinese FDI in Africa share -FDI stock of USD 17.7 billion in 2010 in the whole of Africa- is also rather small being about 3.2Pct of Africa’s total stock of FDI in 2010.

In Ethiopia the World Bank survey under discussion offers a figure of USD 58 million in 2010 and USD 74.3 million in 2009 as Chinese FDI in the country. This is consistent with that of Chinese Ministry of Commerce. However, if the World Bank didn’t fail to go a bit further, it would have discovered figures that were much less in the previous periods; just USD9.7 million in 2008 and USD 13.2 million in 2007, USD 23.9 million in 2006 and USD 4 million in 2005. Thus, the average annual figure since 2005 is just USD 18.3 million. In Ethiopia, the Chinese FDI as a percentage of the total FDI flow to the country since 2005 is just 6.9Pct. So the question is: does the FDI survey under analysis deserves all the resource and attention of the World Bank, if the objective is to understand the Chinese investment engagement in Ethiopia? I do not think so. This will take me to my next critique of the study.

The second major problem with this World Bank survey relates to the implicit undertone that it gives about Chinese investment in Ethiopia. The study implicitly suggests that ‘this is the Chinese investment engagement situation in Ethiopia’. If one wants to understand Chinese investment engagement in Ethiopia, I believe one has to study what I call Chinese Quasi-FDI in Ethiopia, not the Chinese FDI in Ethiopia using the standard or ‘traditional’ definition of FDI as the World Bank did.

What I would like to call Quasi-FDI could be understood as follows. In addition to direct investment, Chinese firms are also active in major investment activities that are being carried by the governments of Africa such as Ethiopia, especially in infrastructure. We may not take such investment as FDI as such, since it is an investment that is basically carried by the government of Ethiopia or any African country in question with Chinese financing. However, given that most of these projects wouldn’t have been realized without Chinese or other emerging South economies’ financing and engagement, we may refer to them as Quasi-FDI. As can be inferred from the Ethiopian case, such investments are generally more important in showing the Chinese investment engagement in Ethiopia, and also in the continent at large, than the level of FDI using the official or standard definition noted. In Ethiopian case for instance, the Chinese official FDI averages to just about USD18 million per annum, between 2005 and 2010, as we noted above. In this sense, the official figures of FDI greatly understated the actual investment engagement of Chinese entities in Ethiopia, where the Chinese Quasi-FDI in Ethiopia is over USD6.5 billion in major infrastructure projects that are underway since 2009 alone. This makes the Chinese FDI studied by the World Bank 0.00000028Pct of the Chinese Quasi-FDI in Ethiopia - Yes you read it right! 6 zeros before 28!.

In Ethiopia, the Chinese are involved nearly in all power generation projects, except some handled by an Italian firm named Salini, irrespective of the financier of the project. By 2009 the value of such projects is estimated at about USD 1.7 billion. This is in addition to power transmission projects and the government’s universal access program which together amounts to about USD 373 million. This figure must have gone even larger by 2013.

In the transport/road sector, Chinese companies have totally dominated the Ethiopian scene. In general, there were about ten Chinese firms engaged in the construction of roads throughout the country in 2009/10. These firms were engaged in about 60Pct of the road works being carried out in the country. The over 2,000km national and about 30km Addis Ababa railway construction is totally dominated by Chinese firms that brought with them financing. By 2009 the total value of Chinese projects in the road sector has reached over USD0.6 billion. The railway deal with China is estimated at USD3 billion, USD2.1 billion for the national project and about USD0.5 billion for light city rails in Addis Ababa. The same goes in delivering telecommunication technologies.

Invariably Chinese firms that won big contracts are seen remaining in Ethiopia by opening offices and local subsidiaries of their company in the course of their first project in Ethiopia. The Bank survey, hopefully have included these in the data (not reported). In fact the investment data in the last five years shows a growing number of Chinese-Ethiopian joint ventures too, although I was hoping the Bank survey would say a lot about this as it is the main channel for technology transfer and local ownership. Unfortunately we can’t see details of this phenomenon in the survey, except its share which is about 15Pct. It is curious to note in passing, however, that the more the Chinese firms work with the Ethiopian private sector the more they found dealing with government problematic, as can be read from the survey graphs.

Before concluding this article, however, I hasten to add that surveying about FDI using the standard definition as done by the World Bank in the report under analysis is a legitimate research and scientific practice. So, there is nothing wrong with it as long as you have the luxury of spending resources and time on comparatively less important issue with regard to Chinese investment engagement in Ethiopia. In the context of the latter view, definitely the priority given by the bank to the pure FDI study if not outright wrong, is not impressive. More importantly, it may also give a wrong signal about the issue under analysis - Chinese investment engagement in Ethiopia.

Abebe Asamere holds an LLB in Law and BA in Political Science and International Relations from AAU. He was a member of the executive committee and pro bono legal advisor of the Ethiopian Consumers Protection Association for six years. Later on he became president of the Association for about a year. Since 2000, he has been working as consultant and attorney at Law. He was also teaching business law at the School of Commerce at AAU on part time basis for several years. Comments can be sent to abebe.a@ethiopianbusinessreview.com or aasamere@yahoo.com

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